Federal Forum Provisions (FFPs) direct all Securities Act litigation filed in state court to federal court. Delaware’s Supreme Court has ruled that FFPs are facially valid. To date, each state court that has addressed the merits of the question has enforced the FFP before it as lawful and reasonable.
Questions regarding FFP mechanics nonetheless abound, and this Article addresses the most common FAQs about FFPs. In particular, corporations should consider adopting an FFP now. Waiting has no benefit. Publicly traded corporations can most conveniently adopt an FFP in the form of a bylaw. Privately held entities face potential Securities Act liability in connection with registration violations and section 12(a)(2) liability and can adopt FFPs either as charter or bylaw provisions. We view the charter-bylaw distinction as a matter of close-to-indifference. It is also reasonable for corporations chartered outside of Delaware to adopt FFP provisions, inasmuch as most state courts draw substantial guidance from Delaware precedent.
A California trial court recently held that claims against underwriters were not covered by the FFP at issue in that matter. We disagree and welcome California Court of Appeals review of that issue. Other California trial courts have disagreed, as well, finding that substantially identical FFPs do apply to underwriters. However, an essentially costless revision of the form of FFP considered by the California trial courts would eliminate any risk, and we provide two alternative forms of FFP that achieve that result. Corporations with FFPs already in their charters can adopt an additional bylaw to address this risk, or they can amend their charters.
Some FFPs designate a specific federal district court, typically the district in which the corporate headquarters is located, as the venue in which litigation is to proceed. Arguably, federal law governing venue will likely cause the case to proceed in the headquarters district in any event, so companies considering specifying a certain federal district court in the FFP should weigh the risks and rewards of such a provision. For certain foreign issuers, designating a specific federal district court, such as the Southern District of New York, as the venue for all Securities Act claims can be sensible.
Large Securities Act liabilities often also arise in the context of registered debt offerings. Companies should therefore consider including FFPs in the indentures in debt offerings as well.
Jury trial waivers are common in depositary agreements and indentures. To avoid enforceability challenges based on these waivers, particularly in California, these agreements and indentures should either include a severability provision, or the corporation should be prepared, if necessary, to stipulate not to enforce the jury waiver in federal court when moving to enforce an FFP in California or in other states hostile to such waivers.